In the late 1960s, the ideal of a society with free markets was definitively out of favor with the public.

The Great War ended the “century of liberalism” (1815-1914), and the Great Depression pressed governments of all political stripes to intervene in the economy and to disengage from free trade. The Second World War then brought destruction and death all around the world, but also, thanks to the colossal effort made by the Soviets for victory, a certain understanding that in ideological clashes, socialism could prove itself superior to other forms of social arrangements.

Classical liberalism had lost hearts and minds among most voters of the few lasting democratic societies with limited and representative governments, private property, and market-based economies.

However, it was at that time that, unnoticed by many, a new liberalism was taking form thanks to the efforts of a few original thinkers. From time to time, some of those thinkers, many economists among them, would meet at the Mont Pelerin Society’s events and exchange ideas.

Their efforts resulted in a more robust understanding of spontaneous order. That understanding was provided by new insights from economics, such as more subtle ideas about the subjective nature of economic value, the limits of our knowledge about the economy, and the dynamic character of economic activity, to name but a few. Friedrich Hayek’s 1945 The Use of Knowledge in Society is emblematic of those contributions: The real economic problem is not to allocate known resources to known demands but how to coordinate the disperse knowledge possessed by the individuals and impossible to be apprehended by statistics or any other database that could be “scientifically” dealt with.

All those concepts had been lost from mainstream economics, along with lessons about man and society from Adam Smith’s The Theory of Moral Sentiments. Classical economics seemed to be founded exclusively on his Wealth of Nations. By the end of the nineteenth century, economics and, by extension, the liberal order had become associated with utilitarianism, pejoratively called “Manchesterism.” It took about a century for perfectionist ethics to come to be understood as a better justification for non-perfectionist politics1 and as a more rounded moral justification for freedom and responsibility, one proposed by Neo-Aristotelian philosophers inside and outside academia.

Last, but not least, the development of new disciplines along the border of traditional ones, disciplines such as Law & Economics and Public Choice, provided new ways to see social interactions that questioned the motives and the ability of political agents to “do good.” These developments gave new reasons to support social arrangements that guarantee the exercise of individual freedom and responsibility as the best form of social organization to promote human flourishing.

“The success of neoliberals in using advances in social sciences as evidence in favor of social arrangements based on freedom and responsibility have not passed unnoticed by the critics and outright enemies of the open society.”

The success of neoliberals in using advances in social sciences as evidence in favor of social arrangements based on freedom and responsibility have not passed unnoticed by the critics and outright enemies of the open society. A counter-reaction soon ensued.

In legal theory, Karel Vasak’s 1977 Third Generation Theory of Human Rights clearly aimed to challenge the premise that only individuals have rights.2 This theory challenged any defenses against the encroachment on individual rights by the collective.

Also in legal theory, Critical Legal Studies, as proposed in the 1970s by Roberto Mangabeira Unger and others at Harvard, argued that the idea that the legal system exists to distribute justice is a myth. Rather, the legal system is an instrument of class exploitation and, therefore, it is perfectly acceptable to use the legal system as an instrument of political struggle by the left. After all, they claim it has always been done by the right.

In the field of economics and in opposition to the core assumptions of the neoclassical synthesis, which assumes in its models that markets optimize economic activity by the action of economic agents that act rationally and possess perfect information, a new discipline of Behavioral Economics was created.

My intention is to discuss the contribution of Behavioral Economics to our understanding of the liberal order in the remainder of this essay.

To understand the significance of this new discipline, let us explore liberty and its limits in the “Market Approach to Human Behavior” on the one hand, and “Behavioral Economics” on the other. The latter suggests that, although humans are not irrational, they often need help to make accurate judgments and better decisions and, in some cases, policies and institutions must be used to provide that help. The former school of thought holds that government should keep out of the way…. Therefore, much is at stake in the debate between these two positions.

Behavioral economics intends to challenge the economic foundations for individual liberty with the argument that, at times, limits to liberty must be established to improve welfare.

Were some of the issues brought to the modern economic debate by proponents of Behavioral Economics already present in classical economics as proposed by Adam Smith? The answer is in the affirmative, although some of those concerns were later lost by neoclassical economics. However, as the writings of Karl Brunner (1916-1989) show, an effort to consider more realistic assumptions about human motivations and the limitations to the knowledge of economic agents has been going on in mainstream economics even before some of the recent research on economic behavior.

Furthermore, if we compare the free market approach with Behavioral Economics, two camps can be identified. On one hand, some consider Behavioral Economics a useful addition to the paradigm of economic rationality by helping to make it more realistic.

A case in point is Gary Becker, who wrote in 2007:

  • “… classical libertarianism relies not on the assumption that individuals always make the right decisions, but rather that in the vast majority of situations they do better for themselves than government officials could do for them. One does not have to be a classical libertarian—I differ on some issues from their position—to recognize that the case for classical libertarianism is not weakened by the literature motivating libertarian paternalism. Indeed, when similar considerations are applied to government officials and intellectuals as well as to the rest of us, the case for classical libertarianism may even be strengthened!”3

For others, the questions raised by behavioral economists intend to falsify the presumptions that economic agents act rationally.

Those who see Behavioral Economics as an addition to the paradigm of rational choice point to the line of research that simply expands the economic approach to fields of human action other than purely economic activity and to the research meant to explain how some behavior that, prima facie, seems irrational may actually be explained as the result of rational choices.

However, there are some conclusions reached by behavioral economists that are based on unsubstantiated claims and are intended to discredit the paradigm of rational choice, since such paradigm is perceived, as already mentioned, to be a strong justification for free markets and free enterprise.

For instance, take three important behavioral biases mentioned by behavioral economists: overconfidence, loss aversion, and (the lack of) self-control. The question is not whether human beings ever show these biases, but whether the presence of these biases is sufficient to reject the assumption of rational behavior underpinning the idea of individual responsibility. For example, some behavior, such as the lack of self-control or “short-termism,” may be justified in some circumstances in which the time preference of the specific agents may be skewed, such as the one of soldiers in case of war, terminally ill patients, people living in risky environments in general, etcetera.

However, not just economic arguments based on behavioral biases are leveled against capitalism. In addition, the moral criticism of markets is also based on the claims of behavioral biases. In a 2013 piece, for instance, Michael Sandel criticizes Dennis Robertson’s 1954 essay on What Does the Economist economize? by saying that “it ignores the possibility that our capacity for love and benevolence is not depleted with use but enlarged with practice.”4 His comment completely misses the point made by Robertson and, before him, by Adam Smith, that thanks to market exchanges we do not need to befriend “the butcher, the brewer, and the baker” in order to count on their good services and, therefore, we can save our limited time to the ones we care, such as family and friends. In The Theory of Moral Sentiments, Adam Smith says that much: “Society may subsist among different men, as among different merchants, from a sense of its utility, without any mutual love or affection; and though no man in it should owe any obligation, or be bound in gratitude to any other, it may still be upheld by a mercenary exchange of good offices according to an agreed valuation.”

Such (mistaken) claim about human behavior used by Sandel to criticize the reasons people engage in markets if given the chance, demonstrates the rhetorical power of such arguments and why leftists see such value in them.

Both the rational and the behavioral lines of thought about behavioral biases converge on the debate about the public policy design better known as “nudging.” This is the idea that the format in which choices are presented results in predictable changes in people’s behavior without the need to impose mandates. I say that the idea that corporate or government bureaucrats may have the best interest of the public in mind when they decide about “default” options in framing choices that will be made available to the public seems ludicrous. I also considerate it unrealistic the assumption that people would believe that.

Consider the discussion in Richard Thaler’s and Cass Sunstein’s 2021 Nudge: The Final Edition about saving for retirement. For them, “some people are definitively saving too little.” First, this is the opinion of the authors in abstract, without putting themselves in the shoes of the people making those decisions, although they recognize that the problem is concentrated in the cases in which the employers do not offer a pension plan. However, there is no discussion on why certain employers have decided not to offer pension plans. Their solution? To force every employer who does not offer a pension plan to establish a default position by which their employees will be automatically enrolled in a pension fund managed by the government on top of Social Security contributions. If you asked me, I would say that their discussion has nothing to do with an “inherent” bias to not saving enough for retirement. Most likely, the employees short on savings have better things to do with their money in the circumstances in which they found themselves at that moment. For instance, those employees may be investing in their children, expecting to receive support from them later, or any other informal retirement system. Moreover, Thaler’s and Sunstein’s “Nudge” could crowd out these actions (e.g. investing in the education of their children). In the end, it seems that their proposed “solution” has everything to do with increasing the amount of funds under government control.

Next, consider Thaler and Sunstein’s discussion in the same book about the rules for organ donation and how to increase the availability of organs for transplants without disrespecting individual preferences. Their conclusion is that “defaults (positions) have a huge impact on the elicitation of preferences,” which in plain English means that they can count on a tendency of most people accepting whatever is proposed to them by persons in position of authority and with that, consent to things that they would not otherwise take the initiative to do. Such an assumption may be true, but it assumes that people perceive those authorities as trustworthy and as having their best interest in mind. Think about that. If an airline or a telephone company or any other corporation which have carved for themselves a quasi-monopoly offered you a “deal,” would you assume that they have your best interest in mind? Such a premise seems dubious to me. Therefore, “default” positions are not helping people to find “what they really want”, they are just more subtle ways in which people are coerced into doing things they do not want to do.

Finally, consider their discussion on “Saving the Planet.” They decry the fact that nudges to induce people to save energy or even some regulatory mandates such as the ones downgrading the efficiency of domestic appliances or reducing the flow of water in showers are not sufficient to move consumers to really do what they want in terms of conservation. They attribute this to those behavioral biases to an extent that required them to abandon any pretense of “libertarian paternalism” and simply impose a more stringent regulation. However, that ignores a number of things. First, perhaps people are not convinced that there is this strong relation between greenhouse gases and the temperature. Second, even if there is a relation, we are not in a “climate crisis” and there is no reason to sacrifice our current wellbeing for things that will take centuries to unveil if they happen at all. Finally, they totally miss the point that if people are forced to use washing machines that do not wash and take showers that do not pour enough water to the satisfaction of the users, they will find ways around those things if that is in their power.

The bottom line is that the contributions of behavioral economics to a more robust understanding of economic activity requires a lot of theoretical contortions for them to be used as weapons against the liberal order, and a good way to check the potential damage of such misuses is to call them for what they are, ideological mystifications. Consider Daniel Kahneman in his 2012 Thinking, Fast and Slow :

  • “Freedom has a cost, which is borne by individuals who make bad choices, and by a society that feels obligated to help them.”

That renowned author first created a strawman by claiming that the economic approach to human behavior presumes “perfect rationality,” then, he disqualifies the advantages of social arrangements based on freedom and responsibility based on the fact that real human beings are more complex than what is assumed in economic models used purely as heuristic devices.

For more on these topics, see

The entire edifice of neoliberalism may be understood as an intellectual effort to identify new ideas that could convince “enough individuals” (as necessary to support policies) in favor of liberty and responsibility as the foundations of an open and prosperous society. In this sense, a significant part of the research agenda of what is today labeled as Behavioral Economics may be deemed a reaction to neoliberalism, and it should be addressed as such.


[1] See Douglas B. Rasmussen and Douglas J. Den Uyl’s Norms of Liberty: A Perfectionist Basis for Non-Perfectionist Policies, Pennsylvania State University Press, 2005.

[2] Steven L. B. Jensen, “Putting to rest the Three Generations Theory of human rights.” OpenGlobalRights.org, Nov. 15, 2017. Accessed December 29, 2022.

[3] Gary Becker, Libertarian Paternalism: A Critique. Becker-Posner blog, Jan. 1, 2014.

[4] Michael J. Sandel, “Market Reasoning as Moral Reasoning: Why Economists Should Re-Engage with Political Philosophy,” The Journal of Economic Perspectives. Vol. 27, No. 4 (Fall 2013).

* Acknowledgements: I would like to thank Julio Elias, Alejandra Salinas, and Walter Castro for comments on a previous version of my essay

*Leonidas Zelmanovitz, a Senior Fellow with the Liberty Fund, holds a law degree from the Universidade Federal do Rio Grande do Sul in Brazil and an economics doctorate from the Universidad Rey Juan Carlos in Spain.

For more articles by Leonidas Zelmanovitz, see the Archive.